Oil Dips (Again)

Oil prices have slipped back to a seven week low, falling below $60 a barrel on Friday. Over-supply, weaker than expected demand and a rally built on unrealized hopes are to blame.

The largest oil ETF, the $2 billion United States Oil Fund (USO) is down 18% from where it was just a month ago. USO tracks the spot price movements of light, sweet crude oil with a portfolio of listed crude oil futures contracts and other oil related futures, forwards, and swap contracts.

Some analysts point to over production as a driver of lower crude prices. The International Energy Agency reports that OPEC has increased production by 330,000 barrels a day since April as some members ignore quotas to generate additional revenue to help cope with the recession. Iraq has also increased production and plans further increases.

Others point to an expected summer surge in demand that hasn't happened. The industry was counting on a busy summer driving season in the U.S. as well as a pick up in global economic activity to drive up demand for crude. While forecasts for economic growth continue to move into the future, demand for oil in the U.S. is actually down this summer.

Oil prices doubled in the February to April period in anticipation of the demand surge. Those hopes have now mostly faded although some forecasters continue to predict that oil will hit $75 a barrel by year end.

For investors seeking short exposure, the UltraShort Oil & Gas (DUG) and Short Oil & Gas (DDG) ETFs seek to return 200% and 100% of the inverse of the daily performance of the Dow Jones U.S. Oil & Gas Index respectively. Note that the single-day design of these short ETFs present potential tracking problems if held longer than a day.